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Indian Energy Exchange IPO Faces Foreign Investor Outage

Midway through its initial public offering, India’s largest power trading platform Indian Energy Exchange Ltd. found out that overseas investors couldn’t participate in its share sale. That prompted it to cancel share allocation to a clutch of prominent foreign portfolio investors, according to an exchange filing by the company.

IEX’s decision stemmed from the interpretation that foreign direct investment norms don’t allow FPIs to invest in power exchange IPOs, said the company’s managing director SN Goel. The FDI policy says foreign investors can invest in power exchanges only via secondary market transactions.

Last week, soon after these FPIs were confirmed as ‘anchor’ investors, custodians such as Citigroup, Deutsche Bank, HSBC and Standard Chartered raised the issue—that an IPO is technically a primary market transaction and FPIs couldn’t participate in this one.

IEX though considered its IPO to be a secondary share sale since only existing investors were selling stake.

Custodians were not able to confirm this interpretation with the Securities and Exchange Board of India, a custodian at a multinational bank aware of the issue said.

As a result of the differing interpretations, on Tuesday late evening the company decided to cancel the allocation of shares to foreign investors. The IPO closed with a subscription of more than two times. “Since we didn’t have time, we decided to remove FPIs from the IPO and open it up to other domestic institutions,” Goel said.

Axis Capital and Kotak Investment Banking, among the bankers to the IPO, did not respond to BloombergQuint’s calls.

Collateral Damage

While FDI policy posed the first hurdle, a second one appeared concurrently.

FPIs are allowed to transact in the secondary markets only through registered brokers, according to SEBI regulations. And that’s where IEX ran into the second hurdle. The secondary sale didn’t meet the broker criteria.

IEX’s Goel said SEBI exempts FPIs from the broker requirement if they transact in the secondary market through electronic platforms.

But that exemption is only for investments in corporate bonds, said the custodian.

This second complication seems curious as so far FPIs have not experienced any difficulty in participating in IPOs be they a primary issue of shares or sale by existing investor or both.

The IEX situation could cause confusion for other IPOs comprising only offer for sale by investors, said the custodian cited above.

“Sebi would need to clarify that there can be secondary offering through the IPO route, not attracting the provision of the stock broker route,” said Prithvi Haldea, founder and chairman, PRIME Database.

In the past, IPOs with only shareholders selling stake were considered primary market sales and FPIs invested in them, said the custodian. Now, FPIs won’t be allowed unless there is a broker contract, he added.